Paysafe Group — Update 15 November 2015

Paysafe Group

Looking under the hood

Investor day and trading update

Software & comp services

16 November 2015

Price	347.0p
Market cap	£1,661m
$1.56/£
Net debt ($m) at end H115*		9.2
*Excludes rights issue cash of $685m.

Shares in issue	478.8m
Free float	98.5%
Code	PAYS

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	5.3	21.7	45.5
Rel (local)	8.6	29.9	53.4

52-week high/low

357.3p

182.0p

Business description

Paysafe Group is a global payment solutions specialist operating in three areas: payment processing, eWallets and prepaid services.

Next events

FY15 trading update	January 2016
FY15 results	March 2016

Analysts

Katherine Thompson	+44 (0)20 3077 5730
Dan Ridsdale	+44 (0)20 3077 5729

tech@edisongroup.com

Edison profile page

Paysafe Group is a research client of Edison Investment Research Limited

At Paysafe’s inaugural Capital Markets day, management outlined its plans to grow individual business lines, while driving cross-selling initiatives to exploit the existing merchant base. The Q3 trading update confirmed that trading remains strong and cost benefits from integration are tracking ahead of target. We leave our forecasts unchanged pending the year-end trading update in January 2016.

Year end	Revenue ($m)	PBT* ($m)	EPS* (c)	DPS (c)	P/E (x)	EV/EBITDA (x)
12/13	253.4	41.9	15.1	0.0	35.8	59.5
12/14	365.0	69.2	22.0	0.0	24.6	38.0
12/15e**	589.3	98.6	20.7	0.0	26.2	24.5
12/16e	856.4	196.6	34.1	0.0	15.9	13.1

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Includes Skrill from 10 August 2015.

Q3 trading strong, cost synergies ahead of plan

The company saw continued strong trading in Q3, and most importantly, the acquired business is trading in line with expectations. The company expects to achieve cost synergies of $5-10m by year end, ahead of target, and is maintaining its $40m target for FY16.

Strengthening its position in the payments market

The Capital Markets day provided a deeper dive into the individual business lines, with divisional management outlining their growth strategies. In addition, cross-selling initiatives are in place to take advantage of the existing customer bases in each business and presence in multiple geographies. The CEO commented on the desire to increase the company’s relevance in the payments space – successful cross-selling initiatives would see the company earning more money across the entire payments value chain: issuing, acquiring, processing, wallets and prepaid vouchers. Adding cardholder present acquiring capability (particularly for mobile point of sale) presents another opportunity for growth, allowing the company to better compete in the mobile space.

Valuation: Discount unwarranted

The stock trades broadly in line with peers on an EV/EBITDA basis but trades at a discount on a P/E basis for FY16e and FY17e. The Skrill acquisition broadens the company’s product offering and geographical exposure and helps reduce exposure to its largest merchant. In addition to the already targeted cost synergies, the enlarged group has the potential to generate additional revenue and cost synergies in excess of our forecasts. Strong cash generation should quickly reduce the group’s debt position; the CEO stated that assuming the integration of Skrill progresses well, the company would consider making further acquisitions from the end of FY16. Paysafe is seeking admission of its shares to the Main Market and should be eligible for inclusion in the FTSE 250. It anticipates that the earliest date for FTSE 250 inclusion would be the March 2016 quarterly review.

Capital Markets update

Paysafe held its inaugural Capital Markets day on 10 November. The company introduced the heads of each business line, who outlined the growth strategies for their respective businesses. The CEO highlighted that the overall aim is to increase the company’s relevance in the payments market. In addition to growth from new merchants, products and geographic expansion, the group is keen to maximise cross-selling opportunities so that it can be a participant in multiple stages of the payment process: for example, being a prepaid card issuer, while also acting as the acquirer, or being the acquirer for Skrill and NETELLER wallets.

The company has now changed its name from Optimal Payments to Paysafe Group and is keeping the brands for some of the businesses: Skrill wallet, NETELLER wallet, paysafecard, payolution and FANS Entertainment.

As a reminder, we show the split of revenues for our FY16e forecast, (which includes a full year of all businesses).

Exhibit 1: FY16e revenues by division

Source: Edison Investment Research

Prepaid

This division incorporates the paysafecard and Ukash cash voucher businesses, now all branded as paysafecard. The vouchers are used by consumers who:

■

do not have a credit card (in Germany, less than 25% of population) or bank account; or

■

want to control their or their children’s spending online; or

■

are security conscious and do not want to provide banking details online; or

■

want to remain anonymous while spending online.

The vouchers are sold at 500,000 points of sale (distributors) in 41 countries and can be used to buy products or services online from 4,500 merchants. From the merchant perspective, benefits include guaranteed payment (no chargebacks) and security. Distributors benefit from easy integration into existing terminal infrastructure and increased footfall and spend. Online gaming and gambling are the main verticals to date: unique users are split 51% online games, 22% sports betting, 19% online poker, and 8% other (eg music streaming, VOIP services).

Growth strategy

■

Existing markets: improve distribution coverage and quality of POS; add alternative distribution channels eg ATMs; undertake marketing activities including attendance at fairs/exhibitions; and product enhancements.

■

Add new merchants: ask customers who they would like to spend money with; diversify into non-gambling markets eg music download, video streaming, dating; get into large tech accounts such as Sony Playstation, GooglePlay; and leverage the merchant base within the group.

■

Move into new countries: focus on cash-driven markets; follow existing merchants; and consider further M&A.

Digital wallets

This division includes the NETELLER and Skrill wallets. It is headed up by Lorenzo Pellegrino, who has been at NETELLER for three years, prior to which he headed up business development for seven years at Skrill. While the two brands continue to be marketed separately, behind the scenes the businesses are being integrated with the target of a common technology roadmap.

Growth strategy

■

Increase volume from existing gambling merchant customer base. The wallets are used by 99% of gambling operators. The company estimates that the wallets are processing less than 10% of the total available market, and in the UK this is less than 2%. There are account management initiatives in place to drive volume growth.

■

Continue to drive growth in forex operators – more than 300 on-boarded in the last 12 months.

■

Address new verticals – for example, NETELLERGO! is aimed at online retail (no user registration is required, increasing conversion).

■

Grow the remittances business – now charging 1% per transaction and already processing $700m per month. This makes it possible to send/receive money instantly where there are no banks, and the business is therefore developing MNO relationships in emerging markets.

■

Developing a new mobile-native app for NETELLER (already have for Skrill).

Payment processing

This division incorporates the original NETBANX business plus the Meritus and GMA acquisitions from 2014. The NETBANX business has always focused on medium- and high-risk merchants – the company has developed risk-management processes to enable the business to take on these merchants and price appropriately, whereas many banks and traditional processors are not keen to take on the higher-risk merchants.

Once merchants are signed up to use Paysafe’s payment processing service, the business sees very low levels of churn. The main reasons that merchants stay with Paysafe include its good acquiring bank relationships, its technology (eg risk management tools, chargeback management, recurring payments engine), and its customer service.

Growth strategy

■

Gain share in key verticals of interest.

■

Increase brand awareness.

■

Cross-sell products to drive incremental revenues and increase customer tie-in.

Acquiring

In early 2014, Paysafe was approved as a principal member of Visa Europe and MasterCard Europe, giving it the ability to become an acquirer for Visa and MasterCard transactions in Europe. Paysafe’s acquiring services went live in November 2014, so have now been operational for a year. The business can offer acquiring services to new merchants and expects to be able to transfer some existing merchants over from Paysafe’s acquiring bank partners. Due to a high level of interest from new merchants, the business has not yet transferred as much existing business across as originally expected, but expects to target roughly 30% by volume. Paysafe is targeting lower risk new merchants for acquiring, now that it does not have to pay away a proportion of the fees charged to partner acquiring banks. This should help the business to build a more balanced portfolio of merchants.

Growth strategy

■

Cross-border acquiring. The business is currently focused on UK merchants but the strategy is to expand geographically.

■

Migrate internal volume – target is 30% of existing UK merchant volume.

■

Allow third-party gateways and PSPs to use Paysafe’s acquiring offering.

■

Move into cardholder present (currently only supporting cardholder not present [CNP]), in particular to support mobile POS.

Card solutions

This division is authorised to issue MasterCard prepaid cards; it already issues for NETELLER (Net+ card) and Skrill, but also offers a white label service for companies wishing to offer their own prepaid cards. Examples of uses include payroll, affiliate payments, currency, loyalty and gift cards. To date, the division has dozens of clients including MistralPay, SEQR, Revolut and Payfriendz.

payolution

This business provides an invoicing service for online merchants, enabling consumers to pay for goods once received, rather than at the time the goods are ordered. payolution pays the merchant at the time the product is sold, and invoices the consumer for the cost once the goods are shipped. The company relies on several banks to provide the funds for the period of time between merchant payment and receipt of funds. payolution charges the merchant a percentage of the value of the goods. The business is active in Germany, Austria and Switzerland (DACH).

Growth strategy

■

Geographic expansion beyond DACH region.

■

Expand into new verticals such as gaming and travel. This could include offering a service for micropayments, which could be billed on a monthly basis.

■

Trading update

Also on 10 November, the company released its Q3 trading update. Trading in Q3 was strong and FY15 group revenue and EBITDA (pre-synergies) are in line with management expectations. The CFO highlighted that they are particularly pleased that Skrill has traded in line with expectations, as there is always a risk with an acquisition that once the deal completes, the acquirer discovers issues within the acquired business. As previously flagged, paysafecard has seen a negative impact from having to suspend operations in Greece for several months. It has recently restarted there as a local operation ie only for merchants with bank accounts in Greece, and is already seeing good uptake. The company also expects to achieve $5-10m in cost synergies by year end, at least one quarter ahead of its expectations, helped by a hiring freeze once the acquisition was announced. The $40m target for cost synergies in FY16 still stands, although there is the potential for this to be beaten. We leave our forecasts unchanged pending the FY15 trading update in January.

Exhibit 2: Financial summary

	$000s	2011	2012	2013	2014	2015e	2016e	2017e
Year-end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		127,972	179,072	253,367	364,954	589,275	856,410	909,963
Cost of Sales		(53,868)	(89,648)	(121,484)	(175,830)	(290,116)	(406,371)	(434,188)
Gross Profit		74,104	89,424	131,883	189,124	299,159	450,039	475,774
EBITDA		18,738	28,275	53,106	83,044	128,976	240,606	256,834
Company EBITDA		17,453	27,563	52,213	86,063	134,765	240,606	256,834
Operating Profit (before amort acq intang, SBP and except.)		6,698	20,599	42,888	71,257	110,330	214,060	225,287
Amortisation of acquired intangibles		(4,700)	(4,100)	(3,300)	(9,200)	(16,700)	(14,700)	(14,700)
Exceptionals		(25,675)	(7,123)	(1,368)	7,219	(47,190)	(6,000)	0
Share-based payments		(1,007)	(3,931)	(4,512)	(8,274)	(14,000)	(14,000)	(14,000)
Operating Profit		(24,684)	5,445	33,708	61,002	32,440	179,360	196,587
Net Interest		(1,540)	(1,800)	(995)	(2,024)	(11,714)	(17,436)	(15,970)
Profit Before Tax (norm)		5,158	18,799	41,893	69,233	98,616	196,624	209,317
Profit Before Tax (FRS 3)		(26,224)	3,645	32,713	58,978	20,726	161,924	180,617
Tax		27	(2,461)	(1,235)	(1,303)	(2,073)	(19,431)	(21,674)
Profit After Tax (norm)		5,185	16,338	40,311	67,703	88,754	173,029	184,199
Profit After Tax (FRS3)		(26,197)	1,184	31,478	57,675	18,653	142,493	158,943

Average Number of Shares Outstanding (m)		216.8	221.6	252.2	277.7	400.6	479.2	482.4
EPS - normalised (c)		2.4	7.0	15.1	22.0	20.7	34.1	36.2
EPS - FRS 3 (c)		(12.1)	0.5	12.5	20.8	4.7	29.7	33.0
DPS (c)		0.00	0.00	0.00	0.00	0.00	0.00	0.00

Gross Margin (%)		57.9%	49.9%	52.1%	51.8%	50.8%	52.5%	52.3%
EBITDA Margin (%)		14.6%	15.8%	21.0%	22.8%	21.9%	28.1%	28.2%
Company EBITDA Margin (%)		13.6%	15.4%	20.6%	23.6%	22.9%	28.1%	28.2%
Operating Margin (before am and except.) (%)		5.2%	11.5%	16.9%	19.5%	18.7%	25.0%	24.8%

BALANCE SHEET
Fixed Assets		72,672	67,393	65,551	294,837	1,646,459	1,635,712	1,622,966
Intangible Assets		63,337	58,526	53,231	281,479	1,630,177	1,617,977	1,605,777
Tangible Assets		9,335	8,867	12,320	13,358	16,282	17,735	17,189
Other Fixed Assets		0	0	0	0	0	0	0
Current Assets		172,743	219,167	184,490	177,275	106,608	231,047	374,905
Cash & cash equivalents		57,956	82,174	164,379	109,893	26,934	136,735	277,658
Restricted NETELLER cash		108,925	123,514	6,198	8,777	8,777	8,777	8,777
Cash held as reserves & settlement assets		0	0	0	38,607	38,607	38,607	38,607
Receivable from Members & Merchants		608	796	0	0	0	0	0
Trade and other debtors		5,254	12,683	13,913	19,998	32,290	46,928	49,862
Current Liabilities		143,957	192,104	117,634	113,618	144,095	144,095	142,063
Creditors		44,234	81,639	107,524	57,448	58,125	58,125	56,093
Payable to Members/Merchant liability		97,741	110,248	0	30,591	30,591	30,591	30,591
Short term borrowings		1,982	217	10,110	25,579	55,379	55,379	55,379
Long Term Liabilities		31,340	9,394	801	150,173	521,373	451,573	383,805
Long term borrowings		8,440	9,394	801	107,205	493,405	438,605	383,805
Other long term liabilities		22,900	0	0	42,968	27,968	12,968	0
Net Assets		70,118	85,062	131,606	208,321	1,087,598	1,271,091	1,472,002

CASH FLOW
Operating Cash Flow		36,319	31,869	94,542	51,469	70,171	219,968	251,867
Net Interest		0	0	(158)	(1,873)	(11,714)	(17,436)	(15,970)
Tax		424	(932)	(1,191)	(1,564)	(2,073)	(19,431)	(21,674)
Capex		(11,222)	(6,467)	(13,567)	(11,094)	(18,000)	(18,500)	(18,500)
Acquisitions/disposals		(25,833)	(1,667)	(5,281)	(169,192)	(1,197,448)	0	0
Financing		(2,755)	3,294	1,188	(13,689)	660,104	0	0
Dividends		0	0	0	0	0	0	0
Net Cash Flow		(3,067)	26,097	75,533	(145,943)	(498,959)	164,602	195,723
Opening net (debt)/cash		64,207	58,718	85,829	118,389*	(22,891)	(521,850)	(357,249)
HP finance leases initiated		0	0	0	0	0	0	0
Other		(2,422)	1,014	(1,697)	4,663	0	0	0
Closing net (debt)/cash		58,718	85,829	159,665	(22,891)	(521,850)	(357,249)	(161,526)

Source: Paysafe, Edison Investment Research. Note: *Difference based on new basis for reporting cash.

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